The solar industry has trillions of dollars in market potential, and now that many flash-in-the-pan companies have gone bust, some real industry leaders are starting to emerge. But the stock market still isn’t giving solar stocks much love. If you’re looking for a great long-term opportunity, here are three stocks to consider.
One of the most underrated stocks of the past decade in the solar industry is First Solar (FSLR 4.64%). The company is one of the most profitable solar companies and its margins are the envy of the industry.
But what is more impressive is the company’s ability to adapt to the new realities of the solar energy market. Over the past few years, First Solar has invested in increasing the efficiency of its solar panels to 16.2%, which is now higher than many basic Chinese panels it was lagging behind. And management aims to reach the 20% efficiency point in the next few years.
But what will make First Solar more valuable in the future is its fully-engineered turnkey solar solution for large-scale projects. He has designed a system that will be easy to install, could include energy storage, and will be more efficient than many competitors. It’s a recipe for success and continued long-term earnings, and with stocks trading at just 6.4 times earnings, I think there’s a lot of upside.
Energy partners 8point3
One of the newer ways to play solar is through yield companies, which own renewable energy projects and pay investors dividends based on their cash flow. Energy partners 8point3 (CAFD) is a creation of First Solar and SunPower, who jointly run the company, and it’s an incredibly cheap stock considering its potential.
The company expects a quarterly payout of $0.2406 per share this quarter, which equates to a dividend yield of 5.6% at today’s price. But the company is also buying projects that will add to that long-term dividend. So far, management has increased the dividend at an annual rate of 15%, with a long-term target of 12% to 15%. And management says it will be able to sustain this growth for at least the next two years.
What sets this Yieldco apart from others is the co-sponsorship structure, which keeps the company disciplined in its balance sheet as well as what it pays for projects. With First Solar and SunPower keeping a long-term view of the solar industry, I think this is a stock to buy and hold for decades to come.
First Solar and 8point3 Energy Partners are stable and cheap stocks, but my third pick is a bit more risky. Vivid Solar (VSLR) is a residential solar installer that was once an acquisition target of SunEdison. But the deal fell through and the company’s shares plunged as a result, reaching a market capitalization of just $334 million today. And therein lies the opportunity for investors.
Vivint Solar has $2.1 billion in customer contract payments and $1 billion in projected retained value. Even when you take out the company’s $500 million in long-term debt, existing contracts should be worth more than the market is pricing. And Vivint Solar could take advantage of some major changes happening in the solar industry.
Its main competitor, SolarCityis in the process of potential acquisition by Tesla Motors, and if Vivint Solar’s situation was any indication, it will leave SolarCity weakened in the short term. But the biggest news might be that residential solar customers are changing their debt financing preferences. Vivint Solar has a loan product through Mosaic, and if it pivots to become a leader in this part of the industry, it could take market share and make more money immediately for investors.
Vivint Solar is not a low-risk solar company, but with the right execution, we could look back to 2016 as a time when the stock was ridiculously cheap.
An industry with a bright future
The solar industry has a multi-trillion dollar market opportunity, and First Solar, 8point3 Energy Partners and Vivint Solar are all likely to be big beneficiaries of its growth. But investors don’t give their stocks much love. This makes them ridiculously cheap for investors willing to buy and hold – to turn the potential of solar power into a lucrative reality.